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Big Tobacco Ordered To Pay Full $800 Million To New York State Under Landmark 1998 Agreement

Schneiderman: Ruling Denying Big Tobacco's Efforts To Avoid Responsibility For Cigarette-Related Illnesses Is A Huge Victory For New Yorkers

NEW YORK - Attorney General Eric T. Schneiderman announced today that a panel of arbitrators threw out Big Tobacco's $800 million claim against New York and instead ordered the companies to pay New York State more than $92 million that they had wrongfully withheld from their 2003 annual payment due under the 1998 landmark tobacco Master Settlement Agreement. The Panel of three retired federal judges - Judges Fern Smith, William Bassler, and Abner Mikva - rejected Big Tobacco's demand for a dramatic reduction in its annual payment to New York, finding instead that the State had fully complied with its agreement obligations and was entitled to its entire payment. This precedent-setting decision is expected to protect the State from many billions of dollars in future claims.

"This ruling is a huge victory for all New Yorkers, and I applaud the panel for denying Big Tobacco's efforts to avoid responsibility for illnesses caused by cigarettes-and paid for by taxpayers," said Attorney General Schneiderman. "Big Tobacco companies contribute to the deaths of thousands of people every year, in large part by luring more and more young people onto cigarettes. Finally, these companies will be required to reimburse the State for money spent treating New Yorkers made ill by their deadly product."

Under New York's escrow statute, only sales of cigarettes on which New York state excise taxes have been paid trigger the escrow requirement. However, for well over 50 years, with the full knowledge of the participating manufacturers ("PMs") and specifically up to and including 2003, New York did not require state excise taxes to be paid on cigarette sales to or on Indian reservations. Consequently, the State did not seek to have non-participating manufacturers ("NPMs") make escrow deposits for their untaxed sales in the State. In rejecting the tobacco companies' claims, the Panel fully recognized New York's long-standing policy of not taxing cigarette sales on Indian reservations.

Background

The costs of treating smoking-related diseases in New York are borne substantially by the State, which administers Medicaid and other health and welfare programs. Beginning in the mid-1990s, New York, as well as many other states, sued the major U.S. tobacco manufacturers, alleging, among other things, a longstanding fraud and conspiracy to hide the health risks and the addictive nature of their products from the government and the public. The 1998 Master Settlement Agreement ("MSA") resolved the separate claims of 52 states and territories ("the Settling States") against the major participants in the United States tobacco industry.

The cigarette manufacturers that signed the MSA agreed to make substantial annual payments to the States in perpetuity. These payments are subject to several adjustments, including a potential downward "NPM Adjustment" in a given year if four criteria are established: (1) PMs experienced an MSA-defined "Market Share Loss" to tobacco manufacturers that do not participate in the MSA, MSA §IX(d)(1)(A); (2) an econometrics firm agreed to by the parties decides that the PMs' participation in the MSA was a "significant factor contributing to" that Market Share Loss, MSA § IX(d)(1)(C); (3) the PMs must have shipped in the aggregate fewer cigarettes in the U.S. during the year in question than they did in 1997, MSA § IX(d)(1)(D); and (4) a Settling State did not have in full force and effect a "Qualifying Statute" or did not diligently enforce its Q! ualifying Statute throughout a particular calendar year. MSA § IX(d)(2)(B). The first three of these requirements were met for an NPM Adjustment against New York for calendar year 2003. As to the fourth requirement, New York had a Qualifying Statute in effect but the PMs disputed whether or not New York had diligently enforced that statute in 2003.

The dispute hinged entirely on the construction of a New York statute: whether untaxed reservation sales of cigarettes to the public were subject to escrow collection under New York's escrow statute. The statute specifically requires that NPMs make escrow deposits for every "unit sold" in the state in that sales year and defines a "unit sold" as a cigarette on which state excise taxes were paid and excise tax stamps were affixed. (See NY Public Health Law §§ 1399-nn to 1399-pp.) New York had a nearly 100% escrow collection rate for all state excise taxed NPM cigarettes sold in the state.

Despite New York's success in this arbitration, Big Tobacco is nonetheless making the same baseless claims against New York for other years and continues to withhold hundreds of millions of dollars that New York is entitled to.

"This office will make every effort to force the tobacco companies to give New York the money they are unlawfully withholding from the State, including going to court if necessary," said Attorney General Schneiderman.

The case was handled by a team of lawyers from the Tobacco Compliance Bureau headed by Assistant Attorney General Louis Willenken, together with Assistant Attorney General Sarah Evans and Bureau Chief Dana Biberman, under the supervision of First Deputy Attorney General of Affirmative Litigation Janet Sabel.